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TMI Blog2024 (5) TMI 635X X X X Extracts X X X X X X X X Extracts X X X X ..... and surmises, ignoring the factual matrix of the case as well as the nature of the transactions undertaken by the Appellant. 1.2. That the Ld. AO has failed to appreciate the submissions made by the Appellant and further erred in making several observations and inferences in the assessment order, which are factually incorrect and legally untenable. 2. That on the facts and circumstances of the case and in law, the Ld. AO erred in holding that the revenue received by the Appellant from provision of background screening and investigation services is in the nature of 'Royalty' under the provisions of Article 12 of the Double Taxation Avoidance Agreement between India and USA ("treaty"). 2.1. That on the facts and circumstances of the case and in law, the Ld. AO erred in holding that the consideration received by the Appellant for providing solutions to clients is for use of information concerning industrial, commercial, or scientific experience and same is liable to taxed as royalty. 2.2. That on the facts and circumstances of the case and in law, the Ld. AO erred in holding that the Appellant maintains database and provides access to its database hosted on its server ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case and in law, the Ld. AO has erred in initiating penalty proceedings under section 270A of the Act 3. At the outset, it has been brought to our notice that the issue of the involved in the appeal before us, has been squarely covered by the order of the Tribunal in the case of HireRight Ltd., in ITA No. 373/Del/2023 & ITA No. 1884/Del/2022, which read as under:- The two appeals filed by the assessee are directed against the order dated 20.07.2022 and 25.01.2023 of the Ld. Assistant Commissioner of Income Tax, Circle International Tax-2(1)(1) ("AO") passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the "Act") pertaining to Assessment Year ("AY") 2019-20 and 2020-21 respectively. Since the issues involved in both the appeals are common, the same were heard together and are being disposed of by this common order. 2. The assessee has raised the following grounds of appeal:- AY 2019-20 - ITA No. 1884/Del/2022 "1. That on the facts and circumstances of the case and in law, Ld. AO, has grossly erred in determining the taxable income of the Appellant for the subject assessment year at INR 12,54,69,976/-- as against nil returned income and, accordingly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd in law, the Ld. AO has erred in recovering refund of INR 55,647 and levying interest of INR 5,286 under Section 234D of the Act without appreciating the fact that no refund was received by the Appellant for the subject assessment year. 5. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 270A of the Act." AY 2020-21 - ITA No. 373/Del/2023" 1. That on the facts and circumstances of the case and in law, Ld. AO, has grossly erred in determining the taxable income of the Appellant for the subject assessment year at INR 8,51,94,915/- as against nil returned income and, accordingly, the assessment order passed by the Ld. AO is bad in law and void ab-initio. 1.1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in proposing addition of INR 8,51,94,915/- based on mere conjunctures and surmises, ignoring the factual matrix of the case as well as the nature of the transactions undertaken by the Appellant. 1.2. That the Ld. AO has failed to appreciate the submissions made by the Appellant and further erred in making several observations and inferences in the assessment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is engaged in the business of providing human resource background screening services including preemployment background screening, employment, education, verification services and investigative due diligence services. The exact nature of services rendered by the assessee primarily includes verification of the details in respect of the concerned candidate viz. i) educational verification ii) employment verification iii) professional reference iv) other checks including but not limited to global sanction check, criminal check, drugs test, etc. The assessee does not have any permanent establishment ("PE") in India. 3.1 The assessee filed its return of income for AY 2019-20 on 27.01.2020 declaring total income of Rs. nil and claimed refund of Rs. 12,54,69,976/-. For AY 2020-21 it e-filed its return on 05.02.2021 declaring total income of Rs. nil and claimed refund of Rs. 93,27,000/-. The assessee provided background screening and investigation services to its customers in India and received Rs. 12,54,69,976/- and Rs. 8,51,94,915/- in the respective AYs which have not been offered to tax in India by the assessee. 3.2 The assessee has claimed exempt income of Rs. 12,54,69,976/- i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax in India. According to Ld. AO, the reports provided by the assessee are protected by copyright laws and therefore the use of such reports by the clients will result in use of a copyright chargeable to tax as royalty; the assessee maintains a database or has taken such database under licence from its owner and the consideration received by the assessee is for allowing the use of database to its clients and is chargeable to tax as royalty; the screening report provided by the assessee contains confidential information use of which amounts to the use of commercial experience of the assessee chargeable to tax as royalty; and services provided by the assessee are ancillary to the alleged 'royalties' and therefore also taxable as FTS. Accordingly, the Ld. AO proceeded to pass the draft assessment order on 29.09.2021 for AY 2019-20 and on 08.03.2022 for AY 2020-21 proposing to assess the income of the assessee at Rs. 12,54,69,976/- and Rs. 8,51,94,915/- respectively. 4. The assessee filed objections before the Ld. Dispute Resolution Panel ("DRP") stating that the aforesaid allegations made by the Ld. AO are grossly incorrect and made the following submissions before the Ld. DRP:- " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ully submitted that the consideration received by the Assessee cannot be taxed as 'Royalties under the India-UK DTAA for the below stated reasons: - The definition of Royally under the India-UK DTAA unambiguously requires that the consideration received must be for the use of or right to use, any copyright of a literary artistic, or scientific work. However, the Ld. AO has summarily alleged that the consideration received is taxable as royalty under Article 13 of the India-UK Tax Treaty, without specifying the exact nature of the copyright in use. hence the conditions laid down in Article 13(3)(a) is not satisfied. - The Consideration received by the Assessee is for rendering of background screening services and not for use or right to use any copyright of a literary, artistic or scientific work, patent, trademark. design, model, plan, secret formula, or process or information. Thus, the payment received/receivable by the Assessee cannot be termed as Royalties under the provisions of Article 13 of the India-UK Tax Treaty - That the income earned from provision of background screening services is in the nature of business income and in the absence of any presence in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormation concerning industrial, commercial or scientific experience. The information obtained by the Assessee from different sources is in the nature of factual data and in any case it is not an information which would show any kind of commercial experience, skill or expertise. Accordingly, such payments do not fall under the definition of Royalty under the India- UK Tax Treaty and therefore, is not liable to be taxed in India In the light of the detailed arguments in support of the Assessee's claim, it is most humbly submitted that the receipts earned from background screening services involving verification of facts/information cannot in any manner be construed as payments towards Royalties or FTS as defined under Article 13 of the India- UK Tax Treaty. The receipts earned by the Assessee is purely in the nature of business income. However, in the absence of a permanent establishment in India, the receipts cannot be considered as taxable in India Most respectfully, the allegations of the Ld. AO are baseless and devoid of any legal merits of the case." 5. For AY 2019-20, the Ld. DRP vide its order dated 25.05.2022 directed the Ld. AO to complete the assessment by passing a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also not under dispute. Perusal of the agreement of the assessee with Barclays shows the exact nature of services performed by the assessee. We have gone through the relevant extracts of the said agreement and are convinced with the contention of the Ld. AR that the assessee's role is restricted to verification of the information concerning various candidates proposed to be hired by its clients (viz. educational qualifications, past employment details etc.) and providing the clients the relevant facts captured by the assessee during the course of validation. The source of information used for verification of the details may be available on public domain or obtained telephonically from the previous employers of the candidates and in some cases, even the records of the courts/public authorities. It is also evident that the assessee physically verifies the information/data in relation for screening services. The reports generated thereof are delivered to the clients in physical mode and/or through online access. The assessee does not provide any advice/analysis/recommendation on hiring of the employees by its client and does not assume any responsibility with regard to hiring decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merely a report summarising its findings with respect to the background check undertaken by the assessee which is primarily a factual data and cannot per se qualify as literary or artistic or any other copyrightable work. Such a report cannot be copyrighted as it does not fulfil the requirements enlisted under section 13(1)(a) of the Indian Copyright Act, 1957. Also, none of the rights as mentioned in Section 14(a) of the Indian Copyright Act, 1957 have been rested with the client by the assessee while rendering its services. Income from provision of the services rendered by the assessee cannot be characterised as royalty for use of copyright in the report as the client merely has the right to use the findings in the report for its own internal consumption. The client does not have any rights to publicly display, sell/ distribute, copy, edit, modify or undertake any other commercial exploitation of the said report. It is thus evident that the consideration received by the assessee under the terms of its agreement with its client is purely towards provision of background screening services and does not include any consideration for use or right to use any copyright or a literary, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear that there is no imparting of information concerning industrial, commercial or scientific experience by assessee when it issues the reports to its clients. 15. As regards the characterisation of impugned receipts as FTS, in our view, the services rendered by the assessee do not involve any technical skill/knowledge or consultancy or make available any technical knowledge, experience, skill, know-how or processes to the clients. Assessee's role is restricted to the verification of information provided by various candidates proposed to be hired by its clients. It involves seeking information from various sources that is accessible on specific requests and no advice/guidance on the credentials of the candidate is provided by the Assessee to its client. The role of the assessee is limited to validation of data provided by the candidate and provide relevant facts captured during the course of validation. The clients make an independent decision to hire the candidate. Hence, in our view the services should not be considered as FTS under Article 13(4) of the India-UK DTAA. Accordingly, ground No. 1 to 2.3 are decided in favour of the assessee. 4. Hence, in the absence of any ma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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